The Current scenario
Real estate has become a popular investment avenue. However, lack of transparency and tight regulations means buyers are making investment decisions with limited understanding of the risks involved in parking their hard-earned money in real estate. Though you cannot make your real estate investments risk-free, you must be aware of the possible dangers on the road to property ownership. Here, we discuss a few of these pitfalls.
LOOK BEFORE YOU LEAP
Until there are entry barriers and tough rules for developers, it’s your responsibility to verify the builder’s credentials. Instead of looking for dirt-cheap deals by little-known companies, invest in projects by reputed builders. A listed company will be more transparent and likely to comply with regulations.
Location drives a property’s value. A centrally-located property with amenities close by will be more expensive than a property in a far-flung area. However, it is beyond the reach of most. So, investors prefer upcoming locations where civic infrastructure is being planned. Several people who wish to earn good returns invest in properties near proposed infrastructure projects such as metro stations, expressways, highways and airports. Even end-users are attracted by the proximity to public infrastructure and the fact that when these infrastructure projects are completed, the prices of properties will jump manifold.
Smaller units in localities near IT beds or near infrastructure or ring road development, demand higher rental yields also, due to demand of living from people outside Bangalore.
All land-sale transactions are registered. However, land title records in India are in a very bad shape. Several land-related transactions such as partition, mortgage, agreement to sell, court order and acquisition are not required to be registered. Even when a sale is registered, the history of the title is not verified. Unlike most developed nations, which have a system of guaranteeing land titles, India has not even digitised its land records. A few states initiated the process of guaranteeing land titles but could not produce any concrete result.
The lack of clear land titles means all land transactions are risky. If you are buying land, you must trace past ownership to avoid any dispute in the future.
Here is the list of documents required:
- Absolute sale deed in present seller’s name
- Khata certificate & extract from BBMP
- Latest tax paid receipt
- If any loan outstanding on the property, latest statement from bank
- Encumbrance Certificate from date of purchase till date
- Agreement of sale & construction executed by developer in favour of seller
- Latest electricity bill & receipt for the said flat
- NOC from Apartment Association
- Sanctioned building plan
- Possession/occupancy certificate from builder
- All title documents of land owner
- Joint development agreement, GPA, & Sharing/supplementary Agreement, between land owner and builder
- Whether originals are available for inspection if no loan is taken?
- A Copy of all registered previous agreements (in case of re-sale property)
- RTC (Records of Rights and Tenancy Corps) or 7/12 extract
- Conversion Order issued by the concerned Authority
- Registered development agreement (If in case of Joint Development Property)
- Power of attorney/s if any
- Photocopy of Society share certificate & Society registration certificate.
At times, the developer acquires land, launches a project and uses the booking amount to buy another land. Buyers who have opted for construction-linked payments do not pay installments until the construction reaches the promised stage. This creates a cash-flow crisis for the builder. The risk of delay is high in prelaunch and launch stages and falls as construction nears completion. You can reduce this risk by choosing a developer with a good record of timely delivery. Also, check that all the clearances are in place.
Are you paying the right price for the property? To be sure, you must get the property valued by professionals.
Valuation risk is present in new projects as well. Before you book such a property, you must compare prices and features of similar properties in the locality.
Valuation methods are :
- Sales comparison method- it is an estimate of value derived by comparing a property with recently sold properties with similar characteristics
2. Cost approach – method involvesseparate estimates of value for the building(s) and the land, taking into considerationdepreciation
3. Income Capitalization approach – relationship between the rate of return an investor requires and the net income that a property produces
The real estate sector is giving much better returns than the home loan rates. Banks are also more comfortable lending to individuals rather than real estate projects. There is another risk. If construction is delayed or the value of the property does not rise fast enough to yield a return that can cover the cost of funds, you will end up losing money. Also, if the price of the property falls to less than the loan amount, your equity in the house will turn negative. In the downturn, such cases were common in the US. If your share in the house turns negative and the bank decides to recover its money by disposing of the property, you will be liable to pay it the balance amount.
Property sales are often carried out through power of attorney (PoA), a contract in which the seller passes on the right to maintain, rent, lease, mortgage or sell the property to the buyer. A PoA does not transfer ownership rights.
Transaction of immovable properties through PoA has no legal sanctity. According to a Supreme Court ruling in October 2011, immovable properties can be sold or transferred only through registered deeds.
In several locations, an irrevocable power of attorney or sale agreement followed by an irrevocable general power of attorney and then bequeathing of the property to the buyer via a will are used to sell properties that cannot be registered through the legal route. For example, a person may give a power of attorney to his spouse, son, daughter, brother, sister or a relative to manage his affairs or to execute a deed of conveyance. Further , a person can enter into a development agreement with a land developer or builder for developing the land either by forming plots or by constructing apartment buildings. In that connection he can execute an agreement of sale and grant a power of attorney that will allow the developer to further sell the property to prospective purchasers .
You might want to give someone an ordinary power of attorney if: you have a physical illness ,you have an accident which leads to physical injury , you are abroad for a long period of time.
Commercial real estate can be a better source of regular rental income with rental yields of 8-11% against 2-4% from residential property. Also, unlike residential real estate that could be untenanted for a long period, upkeep of commercial property is easier and requires limited operational management because such properties are typically taken care of by professional project maintenance agencies. Property Management Services : These are agency services firms , where the owner need not have to spend time and energy in maintaining this property /ies. The agency takes charge of renting , background verification , ensuring minimum vacancy , communication with tenants , preventive maintenance care ,service requests , resolve plumbing ,electricity and interior work for you in your absence.
Investors do not need to spend on the furnishings either. The tenants generally design the interiors of commercial properties as per business requirements and bear the costs involved. Also, longer term lease agreements, like a 3+3+3 year pact with a pre-determined rent appreciation, are made when leasing commercial space, whereas for a residential property, shorter-term leases are preferred.
FINANCING Your BUY
But while interest rates remain low, the days of quick-and-easy financing are over, and the tightened credit market can make it tough to secure loans for investment properties. However, there is some good news: A little creativity and preparation can bring loans within reach of many real estate investors.
If you’re ready to seek out financing for your residential investment property, these five tips can improve your chances of success.
1. Have a sizable down payment Loan for as much as 90% of the property value in some cases is available from banks and housing finance companies. The interest rate is also competitive. On the other hand, securing a loan to buy a commercial property is more difficult and you can get finance for only up to 60% of the property value. The interest rate is also much higher, thereby making buying commercial real estate more capital intensive. This category is more suited if you have capital available.
- If you have limited funds, then investing in a residential property should be the preferred option. You can avail a long-term loan and structure the deal for a minimal monthly outgo from your pocket.
Unlike commercial properties, which get no tax breaks on principal or interest repayments, investors of residential real estate can avail an array of tax benefits.
- For self-occupied properties, there is tax deduction ofRs.1.5 lakh available under section 80C of the income tax Act for payments made towards principal repayment and up toRs.2 lakh on interest payments, under section 24. Additionally, for investment in affordable housing schemes, under section 80EE, Budget 2016 has proposed an increase in the tax benefits from the present Rs.1 lakh to Rs.1.5 lakh. But this increase in interest deduction will be applicable only for first-time home buyers and on loans not exceeding Rs.35 lakh for homes costing below Rs.50 lakh, and sanctioned in 2016-17 (April-March).
4.You can leverage on your real estate investments by taking a loan against property (LAP). The LAP ratio is close to 65% for residential properties and about 55% for a commercial property. If you already own a house or you are a seasoned, deep-pocketed investor looking for higher return on investment, you could explore the commercial property option.
- Real Estate Investment Trusts (REITs) are likely to become a reality in India soon as the government moves to remove dividend distribution tax (DDT) on them. This is expected to offer commercial developers a liquidity option and retail investors an opportunity to participate in the office realty market’s growth.A DDT of 15% on such SPV ( special purpose vehicles) made such fund raising very unattractive. Two other critical issues — exemption from capital gains tax and state governments’ stamp duty while transferring assets to REIT’s holding company — would be key to REITs’ success .
The future of your investments:
India is an underserved economy in terms of real estate requirements. There is a wedge between demand and supply of housing, largely as a result of information asymmetry. However, with increased market transparency, this demand/supply mismatch can offer immense opportunities for developers and investors alike. The real estate industry is maturing. Until 2014, it was unregulated, fragmented and highly inefficient. Though 2016 will bring in regulation, it will remain fragmented and moderately inefficient. We could see it become a well-regulated, consolidated and moderately efficient industry by around 2020. Growth in the Indian economy will definitely see favourable reflection in the real estate sector, as well.
Regulatory framework A lot of groundwork has been done with the central government’s initiatives: •Once ‘Housing for All by 2022’, the Smart Cities mission, Atal Mission for Rejuvenation and Urban Transformation (AMRUT), etc. begin to roll in earnest, we will see significantly heightened activity in infrastructure and related sectors.
- Norms for FDI in the real estate sector have been eased. The government has relaxed FDI norms in 15 sectors including real estate, defence, single-brand retail, construction development and civil aviation. Under these new rules, non-repatriable investments by NRIs as also PIOs will be treated as domestic investments and not be subject to foreign direct investment caps.
- In order to attract larger investments which are only possible through incorporated entities, the special dispensation of NRIs has now been also extended to companies, trusts and partnership firms which are incorporated outside India and owned and controlled by NRIs. Henceforth, such entities owned and controlled by NRIs will be treated at par with NRIs for investment in India.
- Licensing norms have been relaxed in states like Haryana, which will help release land for affordable housing. Currently, unavailability of land is the biggest challenge to affordable housing.
- The Indian Parliament also passed the Real Estate (Regulation and Development) Bill . This will bring efficiency, transparency and accountability into the real estate sector, as will the introduction of new financing instruments that have immense potential to improve India’s transparency.
The Bill seeks to clamp down on developers by disallowing pre-launches of projects where approvals from the local authorities and registration from the regulator are pending. Developers will have to disclose approval status, project layout and timeframe for completion to the regulator and customers.
The developer will now have to park 70% of the project funds in a dedicated bank account at the outset, which can only be used for the earmarked project.
Developers will now have to sell homes on the basis of ‘carpet area’ and not the ‘super built-up area’. The latter was often misused by developers to levy additional charges for common areas.
The developer will not be allowed to make any changes to the original plan midway without the written consent of at least two-third of buyers. In case of any deficiency noticed after handover of possession, the buyer can contact the developer within a year to seek after-sales service.
The Act proposes to bring parity between the buyer and seller by making the latter liable to pay the customer the same interest as demanded of the buyer.
In case of disputes, the Appellate tribunals will have to adjudicate within 60 days and regulatory authorities will have to dispose of complaints in 60 days.
The Act also provides for imprisonment up to three years in case of promoters and up to one year in case of real estate agents and buyers for violation of orders of tribunals or monetary penalties or both.
Fast Growing smart cities
The smart cities mission of the Govt is a bold , new initiative . It is meant to set examples that can be replicated both within and outside the city . This should catalyze the birth of new cities and set an example. The core infrastructure elements should be :
- adequate water supply
- assured electric supply
- Sanitation and solid waste management
- Efficient urban mobility and public transport
- Affordable housing for all classes of society
- Good governance and citizenship , community involvement
- Safety for women and children
- Access to best libraries , connectivity and health facility
The list of 20 shortlisted smart cities in India set for development are :
Real Estate Bill passed in Rajya Sabha
A shake-up of the property sector is imminent once the Real Estate Bill gets implemented in the next three months, according to India Ratings & Research.
Developers wouldn’t be able to launch new projects before obtaining all approvals and will have to deposit 70 per cent of sale receipts in an escrow account once the new law comes into effect. The new rules are likely to impact the liquidity of real estate players in the short-term, the research firm said.
“This will put pressure on developers to raise more funds (debt or equity). Organised players have access to varied sources of funds, namely loans from banks/non-banking financial companies, non-convertible debentures, private equity and structured debt, thus they are likely to be able to tide over the liquidity crunch, though the debt raising and cost of such funding will result in weaker credit profiles in the short term,” it said.
The new norms prohibit the sale of projects without registration with the Real Estate Regulatory Authority, for which the receipt of all approvals and commencement certificate is a prerequisite.
Sales from new projects are a key source of liquidity for developers. Tighter liquidity could force developers to rely more on joint venture projects with land owners due to lower availability of surplus cash to buy land, said India Ratings.
The research firm also said that the provision of depositing at least 70 per cent of sale proceeds in a separate account will “especially impact developers with projects in cities such as Mumbai or high-end projects in other cities, where the component of land cost is much higher than the construction cost”.
The legislation aimed to do away with improper business practices of the unorganised real estate sector, and bring builders within the ambit of regulations pertaining to timely delivery of projects. The bill will facilitate in injecting FDI into the Indian real estate. It essentially works towards strengthening transparency, information in the public domain, accountability and responsibility for developers.
Sneha Ramamurthy- Research Analyst
Dilzer Consultants Pvt Ltd.
|Real Estate prices across cities 2014-15|
|Residential(rs/sq feet)||Commercial ( Rs/sq ft)||Residential||Comm||Residential||Comm||Residential||Comm||Residential||Comm||Residential||Comm||Residential||Comm||Residential||Com||Residential||Comm||Residential||Comm||Residential||Comm|
|Cappital Gains tax on sale after 3 years||20%||20%||20%||20%||20%||20%||20%||20%||20%||20%||20%|
|TDS @ 1% ( for value > 50lkh )|
|VAT ( for sale of under constr plots) 3%|
|Service tax ( for sale of under construction plots ) 3.625 to 4.35 %|
|LOCATION CONSIDERED FOR EACH CITY|
|Delhi – Karolbagh, Akshardam|
|Mumbai , Goregaon, nariman point|
|Chennai, anna nagar, nungambakkam ( rent)|
|Kolkata- Gariahat, Park Street|
|Gurgoan – DLF city , Sector49|
|Noida – Dadri Rd, Sector 18|
|Pune – Chandan Nagar, Bavdhan|
|Kochi – Kakkanad , Kakkanad ( rents)|
|Bangalore – Bannergatta Mn Rd , Whitefield|
|Hydrabad – Hitech City, Secunderabad|
|Coimbatore – Sarvanampatty, Sarvanampatty (rents)|